The market price of hay varies substantially from year to year, making it extremely difficult to determine its price in the future. Fundamental economics tell us that the future price of a particular good will be determined by expected supply and expected demand. Which variables affecting expected supply and expected demand will be useful to help identify the price of hay in 2007?
From the supply side, residual hay inventory reported by the Livestock Marketing Information Center (LMIC) is a variable that is frequently used to help determine the expected price of hay. As of May 1, 2007, the report indicated that hay inventories in the United States are at the lowest level seen in the past 25 years. In addition, hay producers across the United States are paying more for many of their inputs in nominal terms than ever before. For example, fertilizer prices have astronomically increased again this year. By keeping good financial and production records, producers are able to track their costs and their production levels. Looking at how personal costs have increased or decreased for a given level of output should help in determining which way prices will go and by how much. This gives hay producers a very good idea of the price they should sell their hay at, given different levels of quantity demanded.
This brings us to the demand side of the analysis. The majority of livestock producers across the country have noticed a substantial increase in feed costs during the past year. When determining the quantity demanded of hay for 2007-2008, a person should look at livestock producers - the primary users of hay. Livestock producers have a variety of input choices to provide to their livestock. Thus, by analyzing these substitute inputs, a better idea of quantity demanded can be derived. For example, the price of corn and other feed grain byproducts are expected to be even higher than in 2006. Because substitute inputs are expected to be priced higher, one can conclude that hay prices will be higher than last year. This will occur because livestock producers will use more hay - to the point where the price, given the nutrient level, equals that of its substitutes.
When we bring the expected supply side and the expected demand side together, it looks like prices for hay may rise during 2007-2008. This is a result of the increase in the input cost of hay production, low hay stocks and increased prices of substitutes available to livestock producers. According to LMIC, the average price received by farmers for alfalfa hay in the United States in March 2007 was $20 higher than March 2006. Grass hay was $21.40 higher this past March than it was in the same month in 2006 (Graph 1).
Both producers and consumers of hay need to recognize that prices fluctuate with market and weather changes. Whether prices are rising or declining, suppliers are trying to cover their costs. At the same time, livestock producers are always considering options to find the lowest cost nutrient inputs. It looks as though prices could be higher than last year. If, however, precipitation continues to be above average throughout the spring and summer, we could see hay prices below last year's levels, due to its abundance.